US swiftly adds 22 nations as FATCA ‘partners’ as seminal law keeps marching

It took the US Treasury Department four years to enlist 26 nations to cooperate with the unprecedented 2010 Foreign Account Tax Compliance Act. These 26 nations and other jurisdictions have agreed to supply the US Internal Revenue Service with information on financial accounts and other assets that are kept by US persons in their territory.

But in a single day last week, on April 2, Treasury increased the total of cooperating nations by almost double. It added 22 new jurisdictions to the list of countries that have agreed to implement the sweeping tax enforcement and financial crime law known as FATCA.

The Treasury action is designed to accelerate international adoption of FATCA before the looming implementation date of July 1. Treasury announced that any jurisdiction that has “in substance” to the terms of an “Intergovernmental Agreement” (IGA) with the United States shall be treated as having an IGA in force. In essence, this means these nations and their financial institutions will be treated as complying with FATCA, even if an IGA has not been signed or ratified.

The new FATCA “partner nations,” as Treasury often refers to them, now include jurisdictions as diverse as Australia, Brazil, South Africa and South Korea and cross-border financial centers, such as Austria and Lichtenstein, as well as smaller countries in Europe, the Caribbean and the Middle East (Click here to see the full list on the ACFCS FATCA IGA Scoreboard).

Hours after Treasury’s announcement, three more nations were added to the list of nations that have signed IGAs. Forty-eight nations and jurisdictions are now deemed to have IGAs in effect. Treasury says it expects the number of IGAs to grow quickly in coming weeks as more nations agree to have their IGA status disclosed or enter into agreements “in substance.”

Foreign institutions ask for delay, IRS says ‘no’

By recognizing nations with IGAs in substance but not in actuality, Treasury can effectively reduce FATCA compliance burdens for thousands of institutions in other countries without delaying implementation of the law, says Brian Mahany, a tax attorney at Mahany & Ertl, in Milwaukee.

“Foreign institutions are pushing for a delay and for more information and clarity,” Mahany says. He adds that some vital FATCA forms and US Internal Revenue Service regulations have not been issued in final form.

“The IRS has taken a firm public stand that there will be no further delays. This is a way for the IRS to provide a sort of a backdoor delay,” he continues.

In their parallel announcements, the US Treasury and IRS did not define what an IGA “in substance” means. Mahany believes this may have been an attempt to include as many nations that are now negotiating IGAs as possible.

“How many nations this affects depends on how we define ‘in substance.’ I think the IRS will be very liberal in its interpretation,” Mahany adds.

US Treasury action came 89 days before FATCA comes to life

In general, FATCA requires a broad array of non-US financial institutions to identify US account holders and report them to the US Internal Revenue Service. The law covers US persons subject to US taxation, not just US citizens.

Only 19 nations had finalized IGAs when 2014 began. The US Treasury and IRS attachés around the globe have made a concerted push recently to increase this number before the FATCA July 1 deadline. By then, non-US financial institutions with FATCA duties must have either registered directly with the IRS, or be covered by their nation’s or jurisdiction’s IGA in order to be compliant with FATCA.

Institutions that do not comply face a 30% withholding tax on many payments of income coming from the US. They also face a potential loss of correspondent banking relationships with US institutions.

FATCA was designed to identify US tax evaders with overseas accounts. It was trigged by revelations in 2008 that large Swiss banks had maintained long-running campaigns to lure US taxpayers to open secret accounts in Switzerland outside the view of the IRS.

FATCA will have huge impact on global financial crime cases

It is impossible to say now what the full impact of FATCA will be, but it will undoubtedly have a tremendous impact on the entire financial crime field, beyond tax evasion. The consequences of the operation of FATCA will include the exposure of the proceeds of corruption, fraud, money laundering and other crimes. It may evolve into the most far-reaching financial crime law ever.

IGAs are bilateral agreements on the implementation of FATCA. They are negotiated by the US with other nations or jurisdictions, and commit partner nations to assist with the implementation of FATCA and its enforcement. In exchange, IGAs ease many compliance and reporting requirements for non-US financial institutions.

The US Treasury devised two “Model Agreements” that other jurisdictions may sign. “Model I” IGAs are the most widely-adopted type. They allow an institution to report directly to its tax authority rather than to the IRS. Under the “Model II” IGA, institutions must report directly to the IRS, but the threat of withholding is largely lifted and many compliance burdens are reduced.

Without IGAs, non-US entities face compliance confusion

The US Treasury moved to recognize IGAs “in substance” because the slow process of negotiating formal IGAs left financial institutions in many jurisdictions with murky compliance expectations and duties.

In addition to the 22 jurisdictions that joined the IGA list last week, dozens of nations are said to be in talks concerning IGAs with the US Treasury. Many nations expect to sign an IGA and have long agreed on key points with the US, but are awaiting approval from their governments. Others are attempting to amend their laws or regulations to allow FATCA-related reporting and compliance before concluding an IGA.

Until now, institutions in these jurisdictions faced deep uncertainty on how to prepare for FATCA. Treasury’s recognition of these nations as having IGAs “in substance” provides them with greater certainty and permits them to proceed with registration and customer due diligence procedures before July 1. Nations and jurisdictions with IGAs “in substance” now have until December 31, 2014, to finalize their agreement.

Simultaneously with Treasury’s announcement, the IRS said it would delay the deadline for institutions to register in order to be included on the first publicly-disclosed list of FATCA-compliant institutions. They now have until May 5, 2014, to complete registration with the IRS, ten days beyond the original April 25 deadline. The IRS expects to issue the first public list of registered non-US institutions by June 5, 2014.

Adoption of FATCA by China, Russia is still unsettled

Several major nations, including members of the G-20 group of nations, are still missing from the IGA list. This includes Russia, although the US is reportedly conducting active negotiations with Russian officials. Many South American nations, including Colombia and Argentina, are also missing from the IGA ranks.

With the exception of Japan and South Korea, Asian nations have also been slow to adopt IGAs. China’s FATCA participation remains an open question.

Even so, FATCA’s global spread has already defied the forecasts of many of the law’s critics in the US and abroad, who predicted stiff opposition from other nations. Instead, 48 partner nations have given the US Treasury reason to boast that “robust international support behind FATCA is undeniable,” as Robert Stack, the US Treasury’s Deputy Assistant Secretary for International Tax Affairs, declared last week.

View the ACFCS IGA FATCA Scoreboard